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Fitbit (FIT) Q4 Earnings Beat; Declines 14% on Weak Outlook

Fitbit Inc. FIT reported fourth-quarter 2015 earnings of 29 cents per share, which breezed past the Zacks Consensus Estimate of 20 cents by 45%.  

However, the first-quarter guidance was lower than analysts’ expectations which sent shares down14% in after-hours trading.

Revenues

Fitbit reported revenues of $711.6 million, up a massive 92.2% year over year. This exceeded management’s guidance of $620–$650 million and surpassed the Zacks Consensus Estimate of $645.0 million by 10.3%. The improvement was attributed to a very strong holiday season, especially in the U.S.

The fourth-quarter revenue growth was driven by the company’s three newest products, namely Charge, Charge HR, and Surge. These three collectively accounted for about 79% of the revenues. The mix shift toward higher priced products led to the average selling price for devices increasing 23% to $85 from $69 a year ago.

The company sold 8.2 million connected health and fitness devices in the reported quarter.

Geographically, revenues from the United States accounted for 75% of the fourth-quarter revenues, Asia-Pacific contributed 8%, EMEA brought in 12% and the remaining 5% came from the Americas excluding the U.S.

Fourth-quarter revenues from the U.S. doubled year over year, while that from Asia-Pacific grew 6%. EMEA jumped a massive 191%, while Americas, excluding the United States, recorded a significant rise of 77%.

Margins and Net Income

In the reported quarter, Fitbit’s gross margin was 48.5%, up 49 basis points (bps) sequentially and 266 bps year over year.

The year-over-year expansion in gross margin was backed by the benefit of continued unit cost reductions on Charge, Charge HR and Surge, which are maturing in terms of cost efficiencies like production yields and material costs down.

Pro-forma net income was $71.6 million or earnings per share of 29 cents compared with $46.4 million or earnings per share of 19 cents in the previous quarter and $35.3 million or earnings of 17 cents a year ago.

Fourth-quarter EPS gained from an effective tax rate 26.1% compared with 39% in the year-ago quarter.

On a GAAP basis, net income was $64.2 million or earnings per share of 26 cents compared with $45.8 million or earnings per share of 19 cents in the previous quarter and $39.2 million or earnings of 62 cents in the year-ago period (excluding one-time adjustments).

Balance Sheet and Cash Flow

Fitbit exited the quarter with cash, cash equivalents and marketable securities of $664.5 million, compared with $575.5 million in the previous quarter and $195.6 million last year.

At the end of the quarter, accounts receivable increased $230 million year over year to $469.3 million. Inventory was $178 million, down $98 million from the third quarter, reflecting a burn down of inventory during the holiday season.

Guidance

For the first quarter, Fitbit expects revenues in the range of $420–$440 million. The Zacks Consensus Estimate is pegged at $484 million.

Non-GAAP earnings per share are expected between 0 cents and 2 cents, with share count in the range of 244 million to 246 million. The company expects non-GAAP gross margin to be 46.5% and non-GAAP tax rate of approximately 30%.

The company’s non-GAAP calculation excludes stock-based compensation.

Our Recommendation

Fitbit posted solid fourth-quarter results with both the top line and the bottom line exceeding the respective Zacks Consensus Estimate.

Going forward, several dynamics are expected to drive results. For the first time, Fitbit will be rolling out its products — Blaze and Alta — on a global scale. This involves launching media campaigns globally, driving higher sales and marketing expenses for the quarter.

Also, the timing of shipment into Fitbit’s sales channels will result in the majority of reorders, especially for Alta, in the second quarter. The company expects to incur additional manufacturing costs in first quarter to step up production of the new products to meet expected demand, in turn weighing on the gross margins.

Fitbit has a Zacks Rank #3 (Hold).

Investors may also consider stocks like MeetMe, Inc. MEET, Facebook, Inc. FB and Groupon Ltd. GRPN. While MeetMe sports a Zacks Rank #1 (Strong Buy), Facebook and Groupon carry a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
GROUPON INC (GRPN): Free Stock Analysis Report
 
FACEBOOK INC-A (FB): Free Stock Analysis Report
 
MEETME INC (MEET): Free Stock Analysis Report
 
FITBIT INC (FIT): Free Stock Analysis Report
 
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